LEGAL CONSIDERATIONS FOR COMPUTER USERS

As a result of increased media coverage over the last few months, most organisations are now aware of the Year 2000 problem. Although the size of the problem is now apparent, many organisations are unsure how to deal with it. Legal considerations will play a crucial role in determining how the problem will be dealt with and who will pay for any solution.

The Problem

To save storage space in program coding, most system suppliers allocated only two digits to the year. Therefore "1995" is stated as "95". The Year 2000 is consequently stored as "00". Many computer systems will interpret this as 1900 rather than 2000 causing problems with validations, calculations and storage. Although the problem is greatest with software, it will also affect hardware (including servers), recorded data and any equipment or automated systems which are time or date driven e.g. heating systems and air conditioning.

To prepare for the Year 2000 all organisations should be aware of the following:

Entering New Agreements

1. All new agreements involving the supply of hardware, software and/or the supply of computer services should contain an express warranty that the products and/or the services provided will be Year 2000 compliant. Most suppliers will now provide this warranty upon request and customers should be wary of purchasing products or services from suppliers who refuse to give such a warranty.

2. Customers should insist that Year 2000 compliance is included in any acceptance criteria that may be applicable to the products. Failure of acceptance testing should entitle the customer to demand the fault to be rectified or, where the fault cannot be rectified, the customer should have the option of rejecting the system, terminating the agreement and obtaining a reimbursement of any payments made.

3. There should be a right of access to the source code of software so that, in the event of a problem, the customer can rectify the problem himself or obtain a third party to do so. The right of access must be incorporated into the agreement or, alternatively, an escrow agreement should be entered into.

Basically, an escrow agreement will provide that the source code of the software will be held by an independent third party and, in certain circumstances, will be released to the customer (e.g. bankruptcy of the supplier). A good source code escrow agreement will provide that Year 2000 non-compliance is a trigger event for the purposes of releasing the source code to the customer. The release should occur whenever the customer determines that the software will encounter problems in the Year 2000.

Current Agreements

1. All companies should review their existing agreements to determine their rights in respect of the Year 2000.

2. Most agreements, particularly software agreements, will provide that the software will comply with its functional or technical specification. If the software fails in the Year 2000 it is arguable that the supplier has failed to comply with this warranty. However, most agreements limit the duration of software warranties, usually to a period of 90 days or for a year from date of the supply of the software.

3. Where software is licensed for a lengthy contract term,it is arguable that there is an implied term that the software will work in the Year 2000 and beyond. Breach of an implied term may allow a customer to recover damages. The basis for recovering damages and the amount recoverable will depend upon a number of factors including the loss and expense incurred by the customer. However, in most agreements a supplier will attempt to limit damages which the customer can recover and will usually exclude consequential losses such as loss of profit and loss of goodwill.

Customers should also be aware of the Statute of Limitations 1957 which states that a plaintiff claiming on a contract has six years from the date on which the cause of action accrued to bring an action in the courts. Time runs from the date of the breach of contract which could be the date of the supply of the system.

Practical Steps

There are certain steps which all organisations should take immediately in order to assess the legal effect of the Year 2000 problems:-

1.A Technical Audit

An audit of all software and hardware should be carried out in order to determine the likely affect by the Year 2000. The audit should, wherever possible, be carried out by a reputable independent third party. For large organisations, this audit may take a considerable period of time and, plans should be initiated immediately in order to ensure that it is completed by the time 1st January, 2000 arrives.

As a follow up to the technical audit, letters should be written to the relevant suppliers. These letter should enquire whether the suppliers products are Year 2000 compliant and, if not compliant, what steps will be required to rectify the problem.

2.A Contractual Audit

A thorough audit should be carried out in all of those areas which have been identified as problematic under the technical audit i.e. the agreements relating to the products which are not compliant should be closely examined.

The examination of the agreements should establish the parties respective responsibilities and liability for any Year 2000 disfunctionality. This audit should also identify what the customer's fall back position will be and it should show whether the rights are in place (under the appropriate licences) in order to modify or adopt the products or to get a third party in to make the necessary modifications.

3.Implementation Programme

As a practical step, an implementation programme should be drawn up as soon as possible identifying the rectification work which needs to be carried out, dates for such work to commence (remembering to cause minimum disruption to business where possible) and the parties responsible to carry out the work.

It should also be remembered that Year 2000 compliance will become relevant before 1st January, 2000 and it is therefore crucial that making good is carried out as soon as possible.

This article was intended to provide general guidelines. Specialist advice should be sought about specific facts.